Washington ranked fourth, the same spot it held in 1999 and down two slots from 2002. The slip over the past five years should not be cause for concern, said co-author Robert Atkinson, noting that several new indicators were added this year, some of which Washington didn't score well in.

"I wouldn't put too much stock in it," said Atkinson, adding that the decline was tied more to the methodology than the state's performance.

After issuing the 2002 report, Atkinson remembers receiving calls and e-mails from people questioning why Washington -- which at the time was suffering from the dot-com bust -- ranked second.

"I think all of those people were proven dead wrong," he said. "You would much rather be Washington than you would be Michigan or Alabama or some other state. The strengths that Washington has, as are shown in this report, are very significant strengths. And they were strengths that were able to get Washington over that hump and pretty big downturn in 2001 and 2002."

The state scored especially well in patents (third), venture capital as a percentage of worker earnings (third), job churn (second), online population (sixth) and exports of manufacturing and services (first).

"Washington State comes in at fourth (down from second in 2002), in part on its strength in software (in no small part due to Microsoft), but also because of the entrepreneurial hotbed of activity that has developed in the Puget Sound region and the very strong use of digital technologies by all sectors," according to the report.

Brad Silverberg, co-founder of Ignition Partners, a Bellevue venture capital firm, said that Washington remains a good place to build new businesses.

"I wouldn't trade this location for anyplace," he said. "I think there is an incredible amount of talent here in the Seattle area, a lot of opportunities and lots of great companies." One of the biggest changes is that Seattle has developed a "critical mass" of new companies, which helps in recruiting people from outside the region.

But there are areas of weakness, including foreign direct investment (33rd), IPOs (22nd) and technology in K-12 schools (27th). The report also notes that traffic congestion is causing a drain on the economy.

While Atkinson did not report on investments in higher education, he said the state could do much better in that area. Michigan, Pennsylvania and North Carolina have done more to support universities in recent years, he said.

"For a place that is as high-tech as Washington, the University of Washington could be better in some of these technology fields," he said. "Washington punches below its weight, if you will, when it comes to universities, given the technology intensive nature of their economy."